China's municipal public utilities welcomes foreign investments 1

Public utilities used to be a sector where foreign investments were severely restricted or totally forbidden. A newly released provisional rule ("the Rule") by China's Construction Ministry (the "Ministry") seems to have made attempts toward breaking the ice. The new Rule outlines the general principles, forms and approval procedures for absorbing foreign investments in the public utilities sector as well as the restrictions imposed.

General Principles

Article 4 of the Rule sets forth the general principles on attracting foreign investments in public utilities. It specifies that the use of foreign capitals in public utilities must be in line with the State's industry policy and the middle and long term planning for construction projects and the attraction of foreign direct investments should agree with the Guidelines for Foreign Investments ("the Guidelines") and the Directive Catalogue of Industries for Foreign Investments ("the Catalogue").

There is a special entry in the Forbidden Category of the Catalogue (1997 version) called the Electricity Industry and the Municipal Public Utilities under which the construction and operation of pipeline networks for the supply and discharge of water, gas and heat is specifically listed. This means, according to the Catalogue the construction and operation of such networks by foreign investments is forbidden. However, Article 2 of the Rule, which defines the applicable scope, states that public utilities for the purpose of the Rule includes the municipal water supply, heat and gas supply, public transportation, water discharging, waste water disposal, roads and bridges, environment and hygiene, trash disposal, gardening, etc. Thus, these two articles contravene each other and are quite confusing. Our understanding is that since the main purpose of the new Rule is to lay down basic regulatory frames for use of foreign capital in the public utilities sector and in turn regulate existing foreign investments and further promote foreign investments in this area, Article 2 should prevail over Article 4 at least to the extent that foreign investments are now permitted to access the public utilities. Besides, the Catalogue amended in 1997 now seems outdated and it has been reported that new amendments will soon be made.

Forms of using foreign capitals

Article 3 states that there are two available forms for use of foreign capitals - foreign loans and foreign direct investments. Foreign direct investments include Sino-foreign equity joint venture, Sino-foreign contractual joint venture, wholly foreign owned enterprise and purchase of Chinese stake in an existing business by foreign investors. It can be inferred from this article that even whole foreign ownership may be allowed.

Government Control

The Ministry and its local counterparts are the government authorities in charge of planning for the use of foreign capitals in municipal public utilities sector. The construction authorities at provincial level are responsible for developing an annual plan for use of foreign capitals in public utilities within their respective provinces and then submitting the plan to the Ministry every August. The Ministry should work out a plan at national level based on those submitted by each province and then incorporate into the national overall plan for use of foreign capitals.

The approval procedures for foreign invested public utilities enterprises, as with any other FIEs, can be divided into two stages. The first stage is the approval of the project. For projects requiring government authority approval at central level, the construction authorities at provincial level should firstly submit the Project Proposal to the Ministry for comments; the Ministry will then relay the Project Proposal (together with any comments) to the appropriate government departments for approval. For projects that require government authority approval at provincial level, the construction authorities at municipal level should firstly submit the Project Proposal to their counterparts at provincial level for comment, who will then circulate the Proposal among appropriate authorities for approval.

The Project Proposal should provide, in addition to the necessary contents for any Proposal, the following information: the current situation within the specific region and industry in relation to use of foreign capitals, the form of using foreign capitals and the reason for such choice, the amount of foreign capitals to be used, the budget for the use of the capital and the expected annual return.

The second stage is the approval of the project company, namely the Contract and Articles of Association of the FIE. Usually it is up to MOFTEC or its local counterparts to review and approve the Contract and Articles, however, according to the Rule, the construction authorities at provincial level should firstly review and provide their written opinions before submitting to MOFTEC for approval.

Certain Requirements and Restrictions

The foreign partner of the project company claiming to use foreign direct investment should be identified through the public bidding process or through the comparison of several offers by foreign investors. The Chinese party should commission appropriate consulting companies to research and report on the reputation, legality and capacity to undertake the alleged project, of the foreign investor. This report should include credentials, financial situation, technical, managerial skills, etc. Only if the report confirms the foreign investor as competent, can the Chinese party finally determine the suitability of the foreign partner.

The Chinese party should commission an appropriate valuation agency to evaluate the assets (whether tangible or intangible) presented by each party to the joint venture. The Chinese party should make full consideration as to the feasibility of the cooperative conditions offered by the foreign party with regard to the price of the products furnished by the joint venture and the affordability of local residents.

The Chinese party should have control over at least 50 percent of the total capacity of water or heat supply or other public utilities, in large and middle-sized cities. This provision may allow the foreign investor to own a controlling stake in particular joint ventures, as indicated in Article 3 of the Rule, but foreign investors are prevented, by this provision, from dominating the public utilities market of any one large or middle-sized city. Apparently the approval authorities still reserve discretion over the percentage of foreign ownership in any joint venture through a case-by-case approval process.

Conclusion

The new Rule appears to have opened the public utilities sector to foreign investors compared to the 1997 Catalogue. This demonstrates the great determination of the Chinese government to introduce competition into public utilities sector, one of the most monopolistic markets. Although strict and complicated government control is imposed on foreign investments in this sector, the new Rule is a great step forward toward relaxation of access control.